Wells Fargo Cuts Prospect’s Target After Heated Earnings Call
(Bloomberg) -- Wells Fargo & Co. cut its price target on Prospect Capital Corp., an $8 billion publicly traded private credit fund, over the risk of further dilution for existing shareholders.
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Analysts Finian O’Shea and Jordan Wathen on Thursday cut Prospect’s price target to $4.50 from $5.00 citing the risk of a “significant” decline in the fund’s net asset value, according to a research note seen by Bloomberg. Prospect shares jumped 4.6% on Friday to close at $5.23.
The action follows the release of Prospect’s quarterly results and a tumultuous conference call on Thursday during which Prospect CEO John F. Barry III blasted O’Shea’s questions as “absurd” and challenged his knowledge about the company’s financials.
Prospect has faced increased criticism in recent months over its frequent use of so-called payment-in-kind arrangements, which allow borrowers to defer interest on their debt, as well as its reliance on individual investors for funding and its relationship with a real estate investment trust it fully controls.
Wells Fargo declined to comment while Prospect didn’t respond to a request for comment on Friday.
The Wells Fargo analysts cited the potential that some of Prospect’s preferred shares may be converted into common equity and dilute current shareholders as a risk for the fund, which is structured as a business development company. “Though management described this quarter’s conversion rate as more one-off, we see risk of heavier dilution should market conditions change,” they wrote.
O’Shea is the only sell-side analyst from a major financial institution who covers Prospect’s stock, according to data compiled by Bloomberg. His questions during the Thursday call focused on the potential conversion of preferred shares into common equity, a writedown in Prospect’s portfolio of collateralized loan obligations and investments made by the REIT.
During the exchange, Barry said the write-off in the CLO portfolio was the result of an accounting reclassification that didn’t affect the fund’s net asset value, calling the issue an “irrelevant, immaterial, non-burger.”
Speaking after Barry, Prospect’s president and COO Grier Eliasek attributed the conversion of some preferred shares during the past quarter to a large institutional holder in Israel that needed liquidity, argued Prospect can’t actually invoke conversion options contained in some of its documents and explained that the REIT purchased multifamily property during the most recent quarter and used cash it received from Prospect for capital expenditures.
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